Pound Euro (GBP/EUR) Exchange Rate Soars after Dovish ECB Decision
(Updated 16:30, 14/4/22) The Pound Euro (GBP/EUR) exchange rate skyrocketed to a five-week high today after the European Central Bank (ECB) interest rate decision.
The ECB stayed its current course while highlighting the economic uncertainty facing the Eurozone. The bank said that both the downside risks to growth and the upside risks to inflation have both intensified, illustrating just how precarious the bloc’s economic situation is.
Following the decision, markets pared back their bets for an ECB rate rise.
The ECB’s dovishness puts it at odds with other central banks around the world. The Federal Reserve is set to hike rates by 50 bps at its next meeting, while the Bank of Canada (BoC) and the Reserve Bank of New Zealand (RBNZ) both enacted half-percentage-point rises in recent days.
This policy divergence weighed heavily on the Euro (EUR), causing EUR exchange rates to plunge across the board.
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Pound Euro (GBP/EUR) Exchange Rate Holds Gains following Post-CPI Rally
The Pound Euro (GBP/EUR) exchange rate hit an 18-day high in overnight trade before retreating. Since the European session opened, however, Sterling is creeping back up.
The strength in GBP/EUR comes after the UK’s latest CPI exceeded market expectations. Meanwhile, EUR investors are refraining from placing aggressive bets ahead of the European Central Bank (ECB) interest rate decision.
Pound (GBP) Enjoys Post-Inflation Tailwinds
The Pound (GBP) is holding its ground this morning after rising in response to the UK’s CPI release yesterday.
UK inflation beat forecasts, fuelling Bank of England (BoE) rate hike bets. Although BoE policymakers have struck a dovish tone in recent weeks, markets believe higher-than-expected inflation will force the bank to act.
This seems to be providing Sterling with an ongoing tailwind today. However, fears over the worsening cost-of-living crisis may have capped GBP’s gains.
Domestic concerns could also be limiting the upside for the Pound. The UK faces travel chaos as the Easter holidays approach, with disruption hitting airlines, roads, railways and ferries.
In addition, UK Prime Minister Boris Johnsons finds himself once again embroiled in the ‘partygate’ scandal after being fined for breaching lockdown laws. This political turbulence could be putting some pressure on Sterling.
Euro (EUR) Quiet ahead of ECB Decision
Meanwhile, movement in the Euro (EUR) could be muted this morning as EUR investors await the ECB interest rate decision.
Monetary policy remains a particularly difficult issue for the ECB as it weighs up the risks of runaway inflation and slowing economic growth.
Economists think a large announcement today is unlikely, but the decision and the bank’s tone could still trigger big swings in EUR. As a result, investors seem hesitant to place any aggressive bets.
Pound Euro Exchange Rate Forecast: ECB Decision in the Spotlight
Looking ahead, the ECB decision is in focus. Markets will be paying close attention to the bank’s forward guidance to try and figure out how the ECB will navigate the current economic uncertainty.
If policymakers remain more concerned about the Eurozone economy stalling than the risks of higher inflation then the Euro could slip further.
As for the Pound, any significant domestic developments in the UK could affect GBP.